Lower Your Student Loan Payments

In a tough job market, it’s no surprise that recent (and not-so-recent) college graduates may have trouble paying off school loans, but a new loan repayment program could help take off the pressure of debt.

Starting next month, borrowers in the Direct Loan and Federal Family Education Loan programs will be able to sign up for an income-based repayment plan that allows lower monthly payments than what’s required under a standard 10-year student loan repayment plan. Here’s what you need to know.

Starting July 1, graduates with certain types of student loan debt may be able to make lower than normal payments to their lender if your debt is high relative to your income and family size.

Currently, most monthly student loan payments are calculated assuming the balance will be paid in full within 10 years. With the income-based repayment plan, your loan payment amounts are limited to no more than 15% of the amount your adjusted gross income exceeding 150% of the poverty line.

This means the time you have to repay your loan can extend beyond 10 years, all the way out to 25 years, not including periods of deferment or forbearance.

If you still have a balance after 25 years of repayment, that amount could be canceled, leaving you free of student loan debt altogether, according to the Federal Student Aid Office of the U.S. Department of Education. Public servants paying off their student loans through the income-based repayment plan could have their loan balances canceled after 10 years of monthly payments.

Under the plan, unpaid interest wouldn’t be added onto your principal balance, the initial amount you owe. It would only capitalize when you no longer qualify for partial financial hardship or you leave the IBR plan, according to Sallie Mae, a student loan lender (Stock Quote: SLM).

What You NeedTo qualify, you’ll have to have a Stafford, Grad PLUS or Consolidation loan made under either the Direct Loan or FFEL program that isn’t in default. Parent PLUS Loans and consolidation loans that repaid a Parent PLUS Loan aren’t eligible. However, loans don’t have to be brand new, and qualify regardless of whether they were used to fund undergraduate, graduate or professional education or job training. You’ll only be allowed to choose the income-based repayment option if you qualify for a partial economic hardship, and you’ll have to prove every year that you qualify for partial financial hardship status by giving your lender access to your income tax records. If your income increases significantly, you may no longer qualify for partial financial hardship, but federal rules will allow you to stay in the income-based repayment plan.

How to ApplyFirst, calculate your income-based repayment amount compared with what you’re currently paying or expect to pay. Submit a copy of your most recent tax return to your lender or allow your lender to receive information on your income from the IRS or with other documentation. Your lender will discuss your options with you.